Notorious R.O.B.

At last.

We have arrived at the destination of this series.  (See parts 1, 2, 3, and 4).

In Part 2 of this series, I spoke at length about institutional CRM and why that can be an unbeatable competitive advantage when properly implemented and used. In Part 3, we examined whether an institutionalized brokerage could shift the grounds of competition in such a way as to obtain a competitive advantage.  In part 4, we looked at specialization in real estate.

The culmination of all of these factors is something I am calling “systemic brokerage”.   Systemic brokerage is the future of real estate.

Read the rest of this entry »

I’ve been engaged in much discussion of late on the future of real estate, and we’re having a debate right now between those who believe that the future is made up of numerous independent agents (or small agent teams) operating in low-cost, low-service brokerage models and those who believe that the future actually belongs to Big Brokers who come to their senses and start investing in their future.

Let’s call the former camp Kristians, and the latter camp the Robnecks. Fact is that the Kristians are much nicer, better looking, and have invaluable perspective as on-the-ground practitioners of the craft. On the other hand, the Robnecks have the laws of economics on their side….

But this post isn’t about either one of those Grand Debates. This post is… well, I don’t know what it is. Whimsy, probably — which also happens to accurately describe 95% of the posts on this blog.

Basically, I wanted to offer a bunch of free, unsolicited advice to brokers of all sizes, varieties, and business models. Being that this is free and unsolicited, the approximate value of this advice asymptotically approaches zero on a relatively steep curve. But hey, when has ‘value-free advice’ ever stopped me before?

So… rather than grand theory, here are the top three things I would do if I were running a real estate brokerage in 2009:

1. Get a Clear View of My Business
2. Invest in Technology
3. Hire a Real Marketer

Let’s get into it, shall we? Read the rest of this entry »

Yarr, matey!

First day, first session of RE Blog World, and Mariana Wagner is giving a great talk on taking someone from a random click to a closed customer. The talk itself is really solid, and Marianna is an engaging, conversational speaker. The session is being videotaped, so I’m sure RE Blog World will be posting it up.

But her talk is spurring a thought for me — something I’ve been churning over in my head.

Mariana presented some great “real data” from three weeks of her own operations, her own blog, her own website. The numbers are quite amazing. 154 signups, 66 with real email and phone numbers, etc. leading to twelve contracts (8 in contract, 3 closed, and 1 in negotiation).

Here’s what I’m wondering about:

Mariana is co-owner of the #1 Team in Colorado Springs. She has other “team members”. What does she need them for?

According to Jeff Wheeler, President and COO of Coldwell Banker United (the #1 affiliate of the entire Coldwell Banker network), it is important to keep history of the brokerage industry in mind. As a 20+ year veteran of the industry, he’s seen it all. In his view, before the 80′s, the industry was “broker-centric” — agents were simply workers for the broker. In the 80′s into the late 90′s, with the advent of RE/MAX’s direct-to-agent model, the industry became “agent-centric”. We are today living with the residue of the “agent-centric” industry model, under serious pressure from the new model that is arising: “web-centric” brokerage.

Jeff’s view is that in the current model of the industry, the broker hires agents to bring in leads. Hence, the focus on things like “sphere of influence” and “agent teams”.

But when lead generation happens from the web… what is the value of the agent?

Mariana in a Q&A said that they get 100% of their leads from the website and the blog. Not one lead walks in, not one lead comes from an agent they employ.  So her employees are really doing the transaction itself.  There is value in that, of course, but it isn’t the same value as agents command in an agent-centric model.

The rubber meets the road when we start thinking about the business side of things.

Consider that today, the average brokerage has profit margins in the neighborhood of 3%.  For every dollar they bring in, they end up with 3 cents in profit.  For that, the broker has to take on all of the liability, all of the real estate costs, and all of the technology costs.  That, frankly, is an unattractive business to be in.

In contrast, the average franchise model has profit margins north of 60%.

Why is that?

In my mind, the issue turns on agent splits.  I really can’t see a way for a broker to make a profit on an agent who has a 90/10 split.  Maybe someone will show me the books of a brokerage who is making a profit on that, but I’m not seeing it.

In an agent-centric model, it is the agent who is responsible for business development — for bringing in the leads, bringing in the business.  A broker has quite a bit of incentive in compensating a large salesforce of agents who go out and bring in new business.  It may be that the 90/10 split ends up paying for all of the marketing that the broker would have had to do otherwise.

All of this is now changing with the impact of the web on the industry.  Now, brokers (at least the smart ones who pay attention to things like profit margins) have every incentive to figure out ways to raise that paltry 3% to something more attractive.  Maybe they’ll never get to the 60% margins of pure franchise plays.  But maybe they can get to 10%.

That 7% margin, for a major brokerage that is doing $2-3 billion transaction value, translating to perhaps $60 million in GCI, means $4.2m in additional profits.  Ladies and gentlemen… that’s real incentive.

This is why I believe we are headed towards a “web-centric” model of real estate.  Mariana’s team practice is pointing the way to what the future of brokerage looks like.  Lead generation comes off of the web assets — those web assets require professional management by a small group of professionals who may or may not be licensed realtors.  The leads then get passed to the agents who are simply service providers who do the transaction itself.  The relationship is held at the broker level, through the web.  The value of the agent to the broker is no longer as a source of business, but as a transaction service provider.

And here there be monsters.  We are entering uncharted waters.

What does the overhead for a “web-centric” brokerage look like?  What sort of capital investments must a ‘web-centric’ brokerage make, as compared to the current ‘agent-centric’ model?  What sort of ongoing costs do these brokerages have?

If the agent is a transaction service provider, what is the value of that to a broker?  What, then, will be the resulting agent splits?  Do we start to see the rise of salaried agents who may not be able to bring in business if their lives depended on it, but can work with clients with superior service?

I certainly don’t know.  And prognostication is fun.  But this is an exciting time to be in real estate and technology, because nothing is known.

Here there be monsters, matey.  Yarrr.

-rsh

I'll cover condos -- you take multifamily! GO GO GO!

“One man cannot practice many arts with success.” – Plato

Welcome to Part 4 of this series of too-many-words. Here are the links to previous parts: 1, 2, 3.

Let us review the situation. Upon deciding that the law firm (although not lawyers themselves perhaps) is a fine model for real estate, you have banded with other rainmakers and formed an institutional real estate practice. You have gone forth and installed a set of uniform, customer-centric relationship management processes, together with the computerized tools (CRM) to help them along. You have recruited people to be salaried employee associates, and have provided the best technical and marketing support. Through your institutional strengths, you have successfully changed the very ground of competition.

The last strategic step to consider is specialization.

In any reasonably complex industry, specialists are bound to arise. The competitive advantage of specialization is fairly large, as customers often want to make sure that they are getting the best qualified, most expert service provider. You are more likely to win business, and to be able to charge a premium for your services because the supply of specialists is lower than that of the run-of-the-mill generalist. On the other hand, the disadvantage of specialization is that your market is smaller than that of the generalist, and the demand for your services is lower as a result.

[I must point out before continuing that I mean true specialization, where someone actually has knowledge and skills that the average practitioner does not have. Simply saying one is a specialist in XYZ is mere marketing, and consumers usually can see past that pablum.] Read the rest of this entry »

Stop Global Warming! Drive A Prius Today!

So let’s say that some brave soul out there has decided to gamble away his life at the urgings of a certain blogger who works for a certain data company in New York City. To him, I offer my deepest sympathies.

But courage! If this works, please do remember to look down upon us peons as you fly overhead in your Gulfstream G650. (Damn, even the website for that plane looks like it cost more than I make in a year.)

This brave soul would have gone forth, found rainmaking partners, installed an institutional CRM system, and is ready for business!

Well, not quite… there are still more steps, more things to consider.

One of the things this brave soul and his partners must do is to think about redefining the profession of “realtor”. [ED: Oh, is that it? I was worried they might have to do something hard.... /rolleyes]

Keep in mind that by going the institutional route, the Firm has taken on a very different cost structure than traditional brokerage. Instead of commissioned 1099 independent contractors, the Firm has 1040 salaried employees with benefits (which are costly). It has to take on the cost of CRM, of support staff, and of support professionals in IT and marketing that a traditional brokerage simply does not have. As older and wiser heads have pointed out, the Firm forgoes the very sweet IRS rules treating real estate agents as Statutory Nonemployees.

The 1099-based approach rewards brokerages that unleash a horde of low-training, low-skill agents to go forth and blanket the marketplace. They will make up in volume what they lack in quality, because even the worst agent will probably get her sister to list with her, at least once. Since the 1099 doesn’t actually get paid until some sort of transaction has closed, the brokerage could have nearly an unlimited number of such agents running around. For that matter, it almost appears as if some traditional brokerages have become de-facto landlords to their agents based on some of the desk cost oriented business model.

The 1040-based approach simply cannot compete with this low-cost, low-skill, high-turnover model on the same basis. At the same time, it should be pointed out that the 1099′s simply cannot compete with the high-cost, high-skill, low-turnover model of the 1040-based Firm on its home turf.

Therefore, for the Firm, it becomes necessary to shift the grounds of competition. If your thoroughbred can outrun any other horse running in a straight line, you don’t take him to a steeplechase competition. You take him to the Kentucky Derby. Read the rest of this entry »

An exchange with Mike Farmer in the comments section of this post over on Homegain triggered some thinking on my part.  The Reader’s Digest version of what went on before:

• Louis thought there was too much hype about marketing, and not enough attention on the craft of being a realtor.
• I responded that one reason was that there isn’t much of a craft to being a real estate broker, and that the ones I respect were more of a consultant than a realtor.
• Mike thought it presumptuous of someone who has never brokered real estate to reduce the job of a realtor down into only brokering deals, adding:

The advent of the information age doesn’t make agents and brokers less useful, but more useful in a more sophisticated market where information needs to be filtered through specialized knowledge to create a competitive edge for consumers. Not only as consultants do we earn our money, but through all the actions taken to create profitable and hassle-free transactions. However, I wouldn’t mind sitting in a cozy office and giving advice all day.

• Whereupon, I responded that filtering information through specialized knowledge is the essence of consulting, and clarified that pure brokerage — matching buyers to properties — is not valuable in the Internet era.

But that raises a related set of questions.

1. If “brokerage” (herein defined as “matching buyers to properties”) is the business that realtors are in, then what are their future prospects, if any?
2. On the other hand, if “brokerage” (herein defined as “matching buyers to properties”) is no longer the business that realtors are in, then what is?

As to the first question, in my mind there is no doubt that the purely transactional brokerage is going the way of Republicans in academia: rare, despised and getting hounded out of existence.  The one thing that the computer is insanely good at doing is matching things up by a whole matrix of qualitative and quantitative metrics.  Really, when you think about it, a realtor even in the pre-Internet era derived much of her value from being the human operator of a computer network — the MLS. (Well, at least starting in the Computer Era — I know some folks still remember the Book.)

The analogy I drew was to the travel industry.  There is little doubt that the traditional travel agency business of booking tickets for consumers was decimated by the Internet.  This little study (PDF) by the Small Business Administration was written back in 2001, but remains illustrative, since that industry was getting hammered right from the start of the Internet era.  (A funny stat: the SBA study in 2001 estimated that only 30% of travel will be booked online through 2005; according to this article, quoting Forrester Research, 68% of travel was booked online in 2005.)

I think Mike agrees with that big picture statement: if you are in real estate, but all you’re doing is putting listings into websites, and putting up yard signs… your future looks dim indeed.

But I don’t believe the future looks dim for real estate, and for realtors.  If anything, I think the future looks bright.  It requires a fundamental shift in thinking about what service a realtor actually provides, but that shift has been ongoing for at least a few years.

Go pick any random agent website and read about their self-description.  It usually says something like, “I’m an expert on the market.  I can help you understand what to do, what not to do, avoid mistakes, and maximize your sale price.  Or, if you’re a buyer, I can help you get the best deal possible with the minimum of hassle.”  (That the last two statements are in conflict is another matter for another day.)

So let’s agree that pure transactional brokerage is probably not the business that most realtors are in today, shall we?  (There is an exception for ultra high end real estate, by the way, as there is in any brokerage type of industry — see, for example, private placements.)

Because that still leaves the more interesting question.  If brokerage is not the actual business, then what is?

Is it Sales & Marketing?

A good argument can be made that it is — but what do you do about buyer representation then?

Is it Project Management?

Many agents I’ve personally spoken to over the years thought this was one of their biggest jobs — making sure the transaction goes through smoothly.  That requires coordinating a whole bunch of people, most of whom don’t work for the realtor, like attorneys, appraisers, inspectors, mortgage brokers, etc. etc. to get the transaction done.  That sounds an awful lot like project management.

Is it Psychological Counseling?

A few agents talk about how their value is in making clients feel better about the process.  Assuaging their fears, having tough talks with them to bring them back down to earth, instilling sanity, etc.  Buying a home is a pretty stressful process — selling one, even more so.

Is it Financial Planner?

The purchase of a home is usually the largest investment any family makes — a strong argument could be made that the realtor’s actual business is financial planning.

Is it Consulting?

While the term “consulting” is often too-broad, in this case, I mean specifically that the realtor has specialized knowledge and training unavailable to otherwise intelligent and highly accomplished laymen.  For example, a heart surgeon is probably pretty darn smart and knows a lot of things.  But he doesn’t know squat about land use regulations, mortgage financing, and the effect of termites.  Nor does he know much about what’s going on with the market, what is and is not a fair price, and so forth.  The realtor does (or should).

Never having been a real estate broker myself, I really don’t know the answer.  I can prognosticate and opine, but that isn’t the same thing as an answer.  If you are a realtor, I would love to get your take on this, and perhaps I can formulate an answer at the end of the learning process.

-rsh

Mike Farmer at Bloodhound has an inspirational and thought-provoking post up on what he calls a “Biz 2.0: Super Real Estate Company” would look like. Read the whole thing; it’s long, but worth the time.

By now, readers of this blog know that I am entirely simpatico to Mike’s call for a new enlightened leadership and work processes in real estate.

There is, however, one fly in the ointment for Mike’s vision that I have pointed out before, and it’s worth doing so again.

For his (and my) vision of the Real Estate Company 2.0 to become real, the industry has to abandon one of its hallowed traditions: the independent agent.

The level of unity, organizational pride, and collaboration that Mike is envisioning simply can’t happen when your entire producing workforce thinks of themselves as independent contractors in business for himself/herself.

The truth is that a company needs leadership, but a committment to the on-the-ground salesforce is critical to retention and productivity. With intranet 2.0, voices across the system should be heard and information used for steady improvement and innvoation. With all the communication tools, any part of the company should be able to access rich information about listings, trends, local changes, clients, closings, vendors, etc. with a click or two. The information being fed from the field should be a steady stream. Training should include the skills necessary for agents to learn the importance of information, how to quickly gather it and input it so that it’s meaningful and useful. The infrastructure for this should user-friendly so that agents aren’t burdened with a clumsy, complex system they won’t use. But, companies should also be contracting with more skilled agents.

The Biz 2.0 tools will allow communication and comarederie [sic] throughout the company and create the highest level of co-operaton possible if leadership believes and everyone is on board. Then perhaps companies who hire anyone breathing will be more selective and realize that quality is way more powerful than quantity in this line of work. I venture to guess that a local company who implements these changes could dominate the market their in in no time at all. The environment would be attractive for connected, productive agents and too difficult for those who aren’t serious about RE. It would be very difficult to form a company like this, but it is possible. Can you imagine what 50-100 agents and high-skilled managers with enlightened leadership could accomplish if they were wired and working together toward a common goal?

This is possible, and desirable, but only if those 50-100 agents are not independent contractors whose ultimate (and sometimes the prima facie) loyalty is to his or her own commission splits.

First of all, the level of investment required in such a system and such a process at the organizational level is quite high. An intranet is no joke to setup, nor is it self-maintaining. It takes enormous investment in time and treasure to get a really useful intranet going. Providing truly useful information technology to every member of the organization is expensive, resource-intensive, and time-consuming. A broker might decide to do all of these things to gain a competitive advantage — because he will gain that — but the money to fund all these have to come from somewhere.

Can such a Brokerage 2.0 become uncompetitive in agent splits and still retain the talent it needs? Because the money has to come from somewhere. Apart from commissions, what else can a brokerage tap to fund these initiatives?

Second, and this is connected, the individual employee’s investment of time and energy into maintaining such a “live” organization is enormous. As Mike himself points out, the flow of information from the field has to be steady and constant. Information technology is utterly useless without information. And someone, somewhere has to gather that information and put it into the system.

You see this in practice, in the real world, in commercial real estate where information flow is absolutely the lifeblood of brokerage. You have to know your local market to a degree that many residential brokerages do not. Knowing the inventory, the actual square footage vs. leasable square footage, the comps, the new projects, etc. etc. is critical to competing in CRE. Guess what the #1 pain point for these companies are? Getting that data in the first place.

Many of them rely on their newer agents to do the gruntwork of going door to door, calling on landlords, etc. to find out which tenants are in which buildings taking up how much space and for how long. Many require their agents to go do these market surveys periodically. Some condition the release of the commission check upon meeting the quota of market data gathered. But almost every single one has enormous difficulty getting its agents — who all think of themselves as independent contractors — to do this work that doesn’t benefit any one of them directly. It’s a variation of the tragedy of the commons.

Third, it’s extremely difficult even in an integrated organization (with only employees) to ensure service quality. Take a look at investment banks and law firms, none of whom employ independent contractors to be frontline representatives. They expend enormous resources in recruiting and training, and these companies are aided by professional schools that train individuals for two to three years learning professional competence, as well as government organizations that require compliance to standards.

I simply can’t imagine how this would work where your producers are all entirely independent contractors over whom you the broker have limited control, by law. As I read the IRS ruling, you actually cannot demand that your agents undergo specific training, or do things in a specific company-mandated way. That would constitute control over “means and methods” and make them into your employees. That in turn has significant implications for taxes, for liability, and other legal issues. If you’re going to undertake those things, then you want to do it with your eyes wide open, and with a very different compensation structure.

I’m sure someone somewhere either has tried the agent-less real estate brokerage, or will try it again soon. I think that may help us figure out whether this is a viable business model for real estate or not, and whether Biz 2.0 will be a driver of that model or the beneficiary of it.

-rsh

when you told them that you were going to pursue being a real estate agent?

I’ve never been one, but I have started my own company, and this post really resonated with me.

But the most interesting thing that came out of our conversation that day was this…my friend said that a co-worker former co-worker asked him, “Do you think you be able to find another job like this one.” To which my friend said, “A job like this one…where I am underpaid and there’s no chance for advancement…yeah I can find “that” job. Those are everywhere.”

Working for myself has opened my eyes to a lot of things. Mainly, I could have been a better employee to former employers and living below your means allows you to do “stupid” things like quit your job and start your own business. It’s an adventure and trying at times, but most things worth doing aren’t easy.

Thing is, I figure, real estate agents are all independent contractors who don’t get paid, don’t get health insurance, etc.  They eat what they kill, as far as I know.  It’s sorta like starting your own business.

What sort of responses did y’all get when you told your friends and family you were going to do real estate?  Horror? That look of pity? Congratulations?

-rsh